Ready for MiFID II?
The revised Markets in Financial Instruments Directive – known as MiFID II will come into effect on 3 January 2018. The first attempt, since its inception in November 2007, has shown that not all benefits have been channeled through to the end investor as intended. MiFID II is aimed to address the shortcomings of the original MiFID release and has been amended with enhanced measures in areas such as Investor Protection and Fee transparency as a result of the lessons learned from the financial crisis in 2008. The regulation will affect any business involved in manufacturing, distribution and trading of financial instruments in the EU.
As the compliance deadline for MiFID II approaches, investment firms will need to adapt their business models to demonstrate their commitment to investor protection and maximum transparency.
MiFID is the EU legislation that regulates firms that provide services to clients linked to ‘financial instruments’ (shares, bonds, units in collective investment schemes and derivatives), and the venues where those instruments are traded, namely investment firms. Understanding the business impact of the new requirements is one thing, preparing for the implementation is another—particularly when technology is an area of significant focus.
The European Commission adopted so-called Technical standards supplementing the directive in the course of 2016 and 2017 and thereby setting the stepping-stones for its implementation. The European Securities and Markets Authorities state, “The rules contained in technical standards will bring the majority of non-equity products into a robust regulatory regime and move a significant part of OTC trading onto regulated platforms”.
Among other provisions, the revised version of the comprehensive directive recasts and significantly extends the rules on:
- Investor protection
- Pre- and post-trade transparency
- Trading facilities
- Transaction reporting
- Electronic trading
- Fee transparency, including unbundling of research and payment
- Internal and external controls.
One of the challenges we see in the market is how investment firms will obtain the necessary cost data in relation to the transparency requirements from the manufacturer of the financial products, which may not be subject to MiFID obligations. For example, a bank is providing investment advice on a fund, which is distributed but not manufactured by the bank. In such case, the bank may struggle to obtain the required data from a Fund Management Company.
Deloitte helps firms adapt their business models to comply with this regulation while also addressing trends driven by MiFID II and other regulations worldwide.